(“Laying off thousands of employees means there will no longer be enough people paying into Social Security & Medicare. A system already perceived as broken.  Also, if there is a move to self-direction the CFPB (Consumer Financial Protection Bureau) will no longer exists to ensure safety and protection for people from predatory lending, dark shenanigans and theft by companies professing to be legit banks and brokerages… and lastly, does this also mean that the education curriculum will now change nationwide to ensure that every child/adult is taught how to manage finances and save for their future and that education will now also include basic and advanced core courses in financial literacy like English and Math”.)

Privatizing Social Security

The projected number of Americans who will be 65 and older in 2035 is 77 million.  This is up from 61 million in 2023.

Privatization means that self-directed retirement accounts would replace Social Security taxes and benefits to some extent in a privatized retirement savings system. Taxpayers would invest a portion of their payroll contributions in a separate account for their own benefit, and the account’s value would fluctuate with market prices of investments that might include equity index funds.  

Social Security pools payroll tax receipts from current workers and uses them to pay benefits to current retirees, investing any surplus solely in special debt securities issued by the U.S. government. Proponents of privatization argue that privatizing the system would fix the issue that Social Security trust funds don’t generate sufficient returns, by delivering higher benefits for participants.

Those who oppose privatization counter that it would subject participants to unwarranted investment risks and costs and that it would cost too much to transition from the old system to a new one. They also contend that privatization undermines the very principle of the social safety net and the guarantee that it provides older people

Social Security’s Main Trust Fund

The Old-Age and Survivors Insurance (OASI) Trust Fund is a distinct account within the United States Treasury. It receives a specified portion of payroll taxes collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Based on trust fund-specific tax rates, these contributions, are allocated and deposited daily to the extent they are not immediately needed to cover expenses. This systematic process ensures a steady flow of resources into the fund.

The OASI Trust Fund provides automatic spending authority, enabling the payment of monthly benefits to retired workers (old-age beneficiaries), their spouses, children, and the survivors of deceased insured workers. This authority removes the need for the Social Security Administration to seek periodic funding from Congress for benefit disbursement.

Funds not utilized for immediate expenses—including benefits, administrative costs, and financial exchanges with the Railroad Retirement program—are mandated by law to be invested in interest-bearing federal securities. The interest earned on these investments is subsequently deposited back into the trust fund, reinforcing its financial health.

The Social Security Act Amendments of 1939

Established under Section 201 of the Social Security Act Amendments of 1939, the OASI Trust Fund replaced the old-age reserve account created by the original Social Security Act of 1935. The fund officially became operational on January 1, 1940, marking a pivotal evolution in the administration of social security benefits.

Oversight of the trust fund is managed by a Board of Trustees, which currently comprises six members. Four members hold their positions by virtue of their federal government roles:

1. The Secretary of the Treasury, who serves as the Managing Trustee
2. The Secretary of Labor
3. The Secretary of Health and Human Services
4. The Commissioner of Social Security

The remaining two members are presidential appointees, confirmed by the Senate, as stipulated by the Social Security Amendments of 1983. These appointed trustees serve four-year terms, ensuring a balanced representation and diligent oversight of the fund’s operations.

Privatizing the U.S. Social Security system would involve diverting some or all of the mandated payroll tax contributions into private accounts managed by contributors for their own eventual benefit. Social Security’s main trust fund is expected to run out of reserves in 2033, according to a 2024 report by the system’s trustees.

The program will only have enough income to pay about 79% of the scheduled benefits after that year. These projected statistics apply to the OASI (Old Age, Survivors insurance) Trust Fund, not including the disability benefits trust fund (OASDI- Old Age, Survivors and Disability Insurance). When combined, these trust funds are expected to run out of reserves in 2035 and have only enough income to pay about 83% of scheduled benefits.

The Public’s Interest

With regard to privatization, it is not simply whether ownership is private or public. Rather, the key question is under what conditions will managers be more likely to act in the public’s interest. The debate over privatization needs to be viewed in a larger context and recast more in terms of the recent argument that has raged in the private sector over mergers and acquisitions. Like the mergers and acquisitions issue, privatization involves the displacement of one set of managers entrusted by the shareholders, the citizens, with another set of managers who may answer to a very different set of shareholders.

Chile became the example frequently cited by privatization proponents after successfully privatizing a failing public system in 1981. But Chileans’ trust in their pension system plunged following the financial crisis of 2008 when funds in the system lost about 20% on average. 

Public retirement benefits in Chile remain inadequate for a significant proportion of the population as a result of insufficient contributions, increased life expectancy, and years of poor investment returns.

What Would Happen If We Privatized Social Security?

This growth of privatization has not, of course, gone uncontested. Critics of widespread privatization contend that private ownership does not necessarily translate into improved efficiency. More important, they argue, private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population.

A profit-seeking operation may not, for example, choose to provide health care to the indigent or extend education to poor or learning-disabled children. Efforts to make such activities profitable would quite likely mean the reintroduction of government intervention—after the fact. The result may be less appealing than if the government had simply continued to provide the services in the first place.

Supporters believe that privatizing Social Security would increase the national savings rate and allow workers to earn higher returns on their retirement investments. Critics say that privatization would massively increase the national debt because there would be insufficient income to pay for the system’s existing liabilities.

Transitional Challenges

The cost of the transition from the pay-as-you-go plan is one challenge that would confront any privatization plan. If all payroll taxes could be diverted into private accounts, the government would have to cover benefits for workers who contributed to Social Security and are already retired or will retire soon. Policymakers would have to find money to pay those retirees while leaving younger workers with the means to build up the private retirement accounts.

The benefits of future retirees might have to be cut, or current workers’ contributions increased, along with federal borrowing, to bridge the gap. Americans would have to be willing to accept these sacrifices and abandon Social Security’s social insurance principles to gain additional discretion over retirement savings.

Overriding the privatization debate has been a disagreement over the proper role of government in a capitalist economy. Proponents view government as an unnecessary and costly drag on an otherwise efficient system; critics view government as a crucial player in a system in which efficiency can be only one of many goals.

The Bottom Line

If exchanging the Social Security system’s certainties for the disputed benefits of privatization sounds like a big ask, it’s probably because Americans have repeatedly demonstrated their lack of interest in such a trade.

Details like who will pay for current retirees and those without the means to support themselves in the future keep getting in the way of privatization. But as long as Social Security’s long-term funding remains inadequate, expect the program’s critics to continue proposing alternatives. Note that the more employees we cut out of the system, the lesser amount of payroll taxes will go into Social Security, Medicare and Unemployment. 

Social Security makes up 31% of income for individuals over age 65, according to the Social Security Administration (SSA). With so many relying on this income, those receiving payments on the lower end may be at risk of not having enough money to cover living expenses, leaving them financially vulnerable.

The growing number of retirees relative to the number of workers supporting them caused Social Security to pay out more in benefits than its tax receipts for the first time in decades in 2021. Annual deficits are projected to grow rapidly going forward.

How did this happen?

Life expectancy has increased. Ongoing retirements by baby boomers, an unusually large generation, have aggravated the problem. The number of workers supporting each Social Security beneficiary is expected to decline from 2.7 in 2023 to 2.4 in 2035. Laying off or getting rid of working employees means there will no longer be enough people paying into Social Security & Medicare. 

Also, if there is a move to self-direction the CFPB (Consumer Finance Protection Bureau) will no longer exists to ensure safety and protection for people from predatory lending and theft by companies professing to be legit banks and brokerages… and lastly will this would also mean the education curriculum will now change to ensure that every person is aware of how to manage their finances and include courses in financial literacy.

Conclusion

Under the existing system, Social Security funds are invested in low-risk government bonds. Privatization would mean self-directed retirement accounts would replace Social Security taxes and benefits to some extent in a privatized retirement savings system. Taxpayers would invest a portion of their payroll contributions in a separate account for their own benefit, and the account’s value would fluctuate with market prices of investments that might include equity index funds. 

If there is a likelihood that your Social Security benefits will be a primary source of income when you retire, maximizing your benefits is the key to ensuring comfort and stability in retirement. There are a few different ways to accomplish this, and we will address this in another article on the subject. 

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